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Asia's Dynamic Economies Continue to Lead Global Growth

May 9, 2017

The Asia and Pacific region continues to deliver strong growth, in the face
of widespread concerns about growing protectionism, a rapidly aging
society, and slow productivity growth, according to the IMF’s latest
regional assessment.

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The Regional Economic Outlook for Asia and the Pacific estimates
growth for the region to increase this year to 5.5 percent from 5.3 percent
in 2016. Growth will remain strong at 5.4 percent in 2018, as the region
continues to be the leader of global growth.

The report also cites the more favorable global environment with growth
accelerating in many major advanced and emerging market economies—notably
the United States and commodity exporters—as supporting Asia’s positive
outlook. Risk appetite remains strong in global financial markets despite
some bouts of capital flow volatility in late 2016.

“The signs of growth in the region are encouraging so far. The policy
challenge now is to strengthen and sustain this momentum,” said Changyong
Rhee, Director of the IMF’s Asia and Pacific Department.

Strong growth ahead

In China, the region’s biggest and the world’s second largest economy,
policy stimulus is expected to keep supporting demand. Although still
robust with 2017 first quarter growth slightly stronger than expected,
growth is projected to decelerate to 6.6 percent in 2017 and 6.2 in 2018.

Japan’s growth forecast for 2017 has been raised to 1.2 percent with
support from expansionary fiscal policy and the postponement of the
consumption tax hike (from April 2017 to October 2019). The expansion would
slow down to 0.6 percent in 2018 as the boost from the fiscal stimulus
wears off.

The outlook for other Asian economies is also positive, but with some
exceptions. India’s growth is expected to rebound to 7.2 percent in
FY 2017-18 as the cash shortages accompanying the currency exchange
initiative ease.

In most of the Southeast Asian economies, growth is
expected to accelerate somewhat, supported by robust domestic demand—an
important driver of growth in these countries. Meanwhile, growth in Korea
is projected to remain subdued at 2.7 percent this year despite the recent
pick up in exports, mainly owing to weak consumption.

Uncertain outlook: downside risks

The region’s outlook, however, is clouded with uncertainty. On the plus
side, larger-than-expected fiscal stimulus in the United States or stronger
business and consumer confidence in advanced economies could provide a
further boost to Asia’s exports and growth. Reforms, such as productive
public investment in infrastructure in ASEAN and South Asian economies,
could help prolong the positive momentum.

But if the U.S. fiscal stimulus leads to higher-than-expected inflation
pressures, the Federal Reserve could accelerate the pace of interest rate
increases in response, leading to a stronger U.S. dollar.

Asian economies are especially vulnerable to protectionism because of their
trade openness and integration to global value chains. A global shift
toward inward-looking policies could suppress Asia’s exports and reduce
foreign direct investment to Asia. Furthermore, a bumpier-than-expected
transition in China or geopolitical tensions in the region could also
weaken near-term growth.

Highlights from the report:

Asian economies are expected to grow by 5.5% in 2017, slightly more than last year.

Medium-term risks: population aging in some countries; limited productivity convergence

To tackle these longer-term challenges, countries need: more women and migrants in the work force; stronger pension systems; more trade and foreign investment, along with more research and advanced education.

Challenges to growth

Asia needs to tackle two longer-term challenges: population aging and slow
productivity catch-up. According to the report, Asia is aging remarkably
fast compared to the experience in Europe and the United States. As a
population grows older, there will be fewer workers, and over time, a
shrinking workforce and aging population can mean a rise in healthcare
costs and pension expenditure.

This puts pressure on government budgets,
and can translate into lower growth. The report estimates that over the
next three decades, demographic trends could subtract 0.5 to 1 percentage
point from average annual GDP growth in relatively old Asian economies such
as China and Japan.

Slow productivity growth is another worry. The region has not been able to
catch up to the high productivity levels of countries at the global
technology frontier. Declines in trade and foreign direct investment could
also be harmful to Asian economies given their vital roles in transmitting
technology and promoting domestic competition.

Policies to reinforce growth

Given these challenges, macroeconomic policies should focus on supporting
demand and structural reforms.

The report notes that monetary policy should stay accommodative in
economies with economic slack and below-target inflation rates. Should
inflation pressures gather pace, however, central banks should stand ready
to raise policy rates.

Well-targeted structural reforms would help strengthen the region’s
resilience to external shocks and sustain strong and inclusive long-term
growth. Considering Asia’s rapid aging, policies aimed at protecting the
vulnerable elderly population and prolonging strong growth take on a
particular urgency. These include measures that promote labor force
participation of women and the elderly, as well as strengthening pension
systems.

These policies should be supplemented by productivity-enhancing reforms.
Priorities differ across Asia’s dynamic economies. Advanced Asian economies
should focus on making research and development spending more effective and
raising productivity in the services sector.

In emerging and developing
economies, attracting foreign direct investment and expanding the economy’s
capacity to absorb new technology and boost domestic investment is more
urgent. These steps will help the region to build on and continue with the
growth momentum.

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